Cloud hurts: Server sales continue to slump

Cloud computing---as well as contract manufacturers selling to cloud providers---are hurting server sales and the pain is likely to continue.

The latest server sales tally indicates that higher end systems are increasingly looking like glorified PCs that will experience the same slowing growth picture in the future.

And the cloud is increasingly getting the blame. Cloud computing is to server sales what tablets are to the PC market.

IDC said that server sales fell 3.7 percent in the third quarter to $12.1 billion. Gartner pegged server sales at $12.34 billion, down 2.1 percent from a year ago. Both research firms indicated that HP was the market share leader. HP and Cisco were the only server vendors to show growth in the third quarter.

server sales q3 2013


The reasons for the server slump officially go like this:

  • Integrated systems are selling well and the market is consolidating.
  • Unix server sales are in a downward spiral. 
  • And economic conditions are dicey in multiple regions.

Take all of those with a grain of salt. IDC analyst Matt Eastwood pegs the real problem. "Applications are shifting more and more server demand into cloud service provider datacenters, which is opening up new market opportunity for both ODMs and Chinese OEMs ," said Eastwood. In a nutshell, workloads are moving to cloud farms and operators of those operations have the scale to buy white box in many cases. Note in the chart above how contract manufacturers are delivering the best server growth. IDC said:

ODM Direct server demand grew 45.2% year over year in 3Q13 to $783 million as unit shipments increased 30.7% to 325,685 servers. ODM Direct servers now represent 6.5% of all server revenue and 14.4% of all server shipments. 79.6% of all ODM Direct server revenue was generated in the U.S. in the quarter primarily through sales to Google, Amazon, Facebook and Rackspace. 

Going forward, I see the following for the server market.

  1. First, any server bought today will have to be justified to the hilt once depreciation schedules fade to be replaced.
  2. How will vendors compete when they are increasingly selling to fewer customers running cloud and hosting operations.
  3. Servers---despite converged infrastructure and architectures for integrated systems---will increasingly be a tough sell as they commoditize.
  4. There will be serious employment issues. How many IT workers have made a living maintaining servers? How many folks integrate them in the data center? And how many people make a living selling servers?